Compass Diversified (CODI) Q4 2017 Earnings Report, Transcript and Summary

Good morning and welcome to Compass Diversified Holdings' 2017 fourth quarter and full year conference call. Today's call is being recorded. All lines have been placed on mute. [Operator Instructions]. At this time, I would like to turn the conference over to Leon Berman of the IGB Group for introductions and the reading of the safe harbor statement. Please go ahead, sir.

Thank you and welcome to Compass Diversified Holdings' fourth quarter and full year 2017 conference call. Representing the company today are Alan Offenberg, CEO; Ryan Faulkingham, CFO; and Elias Sabo, CODI'S CEO-elect and a founding partner of Compass Group management. Also joining us today are Dave Swanson and Pat Maciariello, partners of Compass Group management, who will be available for questions during the Q&A portion of today's call. Before we begin, I would like to point out that the Q4 press release, including the financial tables and non-GAAP financial measure reconciliations, are available on the company's website at www.compassdiversifiedholdings.com. The company also filed its Form 10-K with the SEC last night, which includes reconciliations of non-GAAP financial measures discussed on this call. Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income in the company's financial filings. The company does not provide a reconciliation of the ratio of its estimated cash flow available for distribution and reinvestment to its distribution. This is because certain significant information is not available without unreasonable efforts including but not limited to our company's future earnings, current taxes, capital expenditures and the distribution paid as approved quarterly by our Board of Directors. Throughout this call, we will refer to Compass Diversified Holdings as CODI or the company. Now allow me to read the following safe harbor statement. During this conference call, we may make certain forward-looking statement, including statements with regard to the future performance of CODI. Words such as believes, expects, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements, and some of these factors are enumerated in the risk factor discussions in the Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 2017, as well as in other SEC filings. In particular, the domestic and global economic environment has a significant impact on our subsidiary companies. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. At this time, I would like to turn the call over to Alan Offenberg.

Good morning. Thank you all for your time and welcome to our fourth quarter and full year 2018 earnings conference call. As many of you know, I recently announced my retirement following a career spanning over 20 years with CODI and its manager, Compass Group Management. It has been an honor to serve as CODI's CEO during the past seven years, and I have been privileged to work with an outstanding group of dedicated professionals. I want to thank the entire CODI team for their unshakable commitment and dedication in building CODI into the leader it is today. Upon my retirement and as previously announced, Elias Sabo, a founding partner of CODI's management, will assume the role of CEO. Many of you already know Elias, who has been with CODI and its managers since 1998. As one of the founders and architects of our business model and a longstanding member of our Investment Committee, Elias has been instrumental to CODI's success in implementing its investment strategy, identifying and growing our leading subsidiaries, and building shareholder value. Our investment and monetization of one of our past subsidiaries, Fox Factory Holding Corp., highlights this approach. Under Elias Sabo's leadership, we acquired Fox, took it public and eventually realized gains from this investment of approximately $430 million. Having worked with Elias for over 20 years, I know he is an exceptional leader and the ideal person to lead CODI as the company builds on its past success and continues to execute on its proven strategy. I'm sure that Elias's deep knowledge of our business as well as strong internal and external relationships will result in a seamless transition. With that, I will now turn the call over to Elias to discuss our fourth quarter and full year 2017 highlights as well as to review the performance of our current group of subsidiaries.

Thank you, Alan. Before discussing our highlights, I'd like to offer my personal thanks to Alan, whose contributions have been a great part of our tremendous growth and success over the years. Over the past 7 years under Alan's leadership, CODI has generated strong results. Specifically, the company has grown cash flows, continued to acquire leading niche industrial and branded consumer businesses, increased total gains realized for shareholders, significantly enhanced our capital structure and provided stable distribution. It has been a pleasure and honor partnering with Alan for the past 20 years, and we continue to work closely together towards a smooth transition. We are all very grateful to Alan, and I want to thank him for his many years of service to CODI and wish him a long and happy retirement. I am truly honored to become CODI's next CEO and look forward to working with our talented management team in leading the company into the future. I am very excited about our company's strong prospects and the many opportunities CODI has to build further value for our shareholders. Going forward, our strategic focus remains unchanged. We will continue to actively seek opportunities to acquire attractive, niche industrial and consumer branded businesses with a strong reason to exist. We will also continue to reinvest in our family of leading middle-market businesses to further drive cash flow growth. Now I'd like to briefly discuss the highlights of 2017, during which we continued to successfully execute on our investment strategy, generate strong cash flow and provide sizable distributions to our shareholders. In 2017 we capitalized on market opportunities and our team's hard work to complete both platform and add-on acquisitions. This includes the accretive platform acquisition of Crosman Corporation, the world's leading designer, manufacturer and marketer of air guns, archery products, optics and related accessories. We also reinvested in our current subsidiaries by completing 3 accretive add-on acquisitions. In March 2017 our subsidiary, Clean Earth, acquired AERC Recycling Solutions, marking the fourth accretive add-on acquisition since acquiring Clean Earth in 2014. In July 2017 our subsidiary, Crosman, acquired the commercial business of LaserMax, a leading designer and manufacturer of gun-mounted laser aiming devices. Lastly, later in the year our subsidiary, Sterno Products, acquired sevenOKs, one of North America's top manufacturers and distributors of premium insulated hot and cold food carriers and accessories for restaurant delivery, stadium concessions, catering operations and school nutrition programs. Complementing these successful acquisitions, we also took steps in 2017 to increase our financial liquidity for add-on and platform acquisitions, including the monetization of CODI's remaining interest in Fox Factory Holding Corp. This transaction generated over $136 million in net proceeds, increasing the gains CODI has achieved for shareholders to over $770 million. Additionally, in 2017 we completed an offering of 4 million Series A preferred shares, generating net proceeds of approximately $96 million. This added a new component to our capital structure that is nondilutive to common stockholders. We are pleased to commence 2018 by continuing to execute on our investment strategy. In February CODI consummated the platform acquisition of Foam Fabricators, a leading designer and manufacturer of custom molded protective foam solutions. This was an attractive acquisition for CODI, as Foam Fabricators possesses the key qualities that we look for in all of our subsidiaries, an experienced, capable management team, a diversified customer base, strong free cash flow and compelling growth opportunities. This acquisition is expected to be accretive to cash flow starting in Q2 2018. Foam Fabricators represents our second platform acquisition in the last 9 months and brings CODI's current number of niche industrial and branded consumer businesses to 10. During the same month CODI completed the add-on acquisition of Rimports for Sterno Products, which is the third add-on acquisition since we acquired Sterno in 2014. Rimports is a leading manufacturer and distributor of branded and private label scented, wickless candle product used for home decor and fragrance. This acquisition is expected to be accretive to cash flow starting in Q2 2018. Looking at our full year 2017 results, our family of leading niche industrial and branded consumer companies continued to generate stable financial results albeit at the lower end of our expectations. During 2017 we experienced unanticipated headwinds, including the bankruptcy of 2 large national retailers that caused both sales disruption and a write-off of approximately $4 million in accounts receivable and ERP implementation at 5.11 that caused sales to shift from 2017 into 2018 and the reduction in our dredge line of business at Clean Earth to a historically low level. However, in the face of these headwinds, we were still able to generate cash flow that was greater than the prior of the prior year and in excess of our distribution, which speaks to the strength of our consolidated earnings power and the benefit of owning a diversified group of subsidiary companies. In the fourth quarter our niche industrial businesses produced results in line with our expectations. Revenue increased 3% over the prior year while EBITDA declined by 7.7%. The decline in EBITDA was primarily due to our Arnold subsidiary, which I will discuss later. Our branded consumer businesses produced fourth quarter results that were below expectations. Revenue declined by 5.7% and EBITDA declined by 10.2%. As previously mentioned, our branded consumer companies were impacted by the bankruptcy of two large national retailers, and in the fourth quarter we had additional accounts receivable write-offs. For the three months and full year ended December 31, 2017, CODI generated strong cash flow available for distribution and reinvestment, which we refer to as cash flow or CAD, of $25.6 million and $92.2 million, respectively. Ryan will provide further details in his comments. For the fourth quarter we paid a cash distribution of $0.36 per share, representing a current yield of 8.6%. This brings cumulative distribution paid since CODI's 2006 IPO to $16.08 per share. We also paid a cash distribution on January 30 of approximately $0.45 per share on our 7 1/4% Series A preferred shares. Looking forward to 2018, we expect significant improvement in our cash flow. With the accretive acquisitions of Foam Fabricators and Rimports, growth in the earnings of our subsidiary, and coupled with the benefits of tax reform legislation, we anticipate that our common distribution payout ratio will improve from 94% to a range of 65% to 75%, assuming the same level of distributions in 2018 as in 2017. Now I will review our subsidiaries' quarterly performance. I will start with our niche industrial businesses, which include Advanced Circuits, Arnold Magnetics, Clean Earth and Sterno Products. Beginning with this conference call, our comments will focus on each company's overall results and outlook and will focus on year-to-date performance. We believe this will enhance our dialogue rather than reiterating information from our SEC filings. The detailed 2017 results are available in our Form 10-K, which was filed with the SEC yesterday. All information that follows will be for the year ended December 31, 2017, and compared to the year ended December 2016. Our niche industrial businesses generated solid performance in 2017. Revenues grew 4.8% from 2016, while EBITDA was essentially flat with the prior year. Advanced Circuits revenue increased 2% from 2016 and EBITDA increased by 2.5%. We believe ACI's 2018 revenue and earnings will be flat to modestly higher compared to 2017. Arnold Magnetics revenue declined by 2.4% and EBITDA declined by 19.7% from 2016. The decreased operating margin is due to investments that Arnold has made to increase its operational capabilities and position the company for future growth. Additionally, in the fourth quarter Arnold experienced a $1.2 million nonrecurring operating expense related to a facility upgrade. We believe Arnold's performance has bottomed out in 2017, and we are seeing positive results thus far in 2018. We expect Arnold to achieve modest growth in 2018. Clean Earth's revenue increased 11.8% and EBITDA increased 2.6% from 2016. The increase in Clean Earth's revenue is partially due to the add-on acquisition of AERC during 2017. Clean Earth performed in line with our expectations despite the dredge line of business performing at historically low levels. We remain confident that our dredge line of business will eventually revert back to normalized levels. We expect Clean Earth's revenue and earnings to grow modestly in 2018. However, resumption of our dredge business could positively impact our results. Sterno Products' revenue increased 3.3% and EBITDA was flat in 2017. The modest deleveraging was due to increased chemical commodity input costs. For 2018, excluding the benefit of the Rimports acquisition, we expect Sterno to perform roughly in line with 2017. Now let's turn to our branded consumer businesses, which include Liberty Safe, ERGObaby, Manitoba Harvest, Crosman, and 5.11 Tactical. Please note that the revenue and EBITDA numbers I provide for Crosman and 5.11 will be on a pro forma basis as if these businesses were acquired on January 1, 2016. Our branded consumer businesses produced results that were below our expectations in 2017 due to the factors I discussed previously. Revenue was flat and EBITDA declined by 2.9% from prior year. The decline in EBITDA was primarily due to accounts receivable write-offs. Excluding those write-offs, EBITDA would have grown modestly. Liberty Safe's revenue declined 11.4% and EBITDA declined by 30.6% from 2016. As mentioned on previous calls, Liberty suffered from the bankruptcy of one of its largest customers as well as generally softer market conditions. We expect Liberty to achieve modest revenue and earnings growth in 2018. ERGObaby's revenue and EBITDA was essentially flat in 2017. ERGObaby suffered from the bankruptcy of one of its largest domestic customers in the fourth quarter of 2017. In early 2018 ERGObaby launched its first product in the stroller category, the 180 Reversible Stroller. We are excited about launching this category and believe it to be a natural fit for ERGObaby's brand. For 2018 we expect ERGObaby to produce results consistent with 2017 with stronger performance in the back half of the year. Manitoba Harvest's revenue declined by 6.1% and EBITDA declined by 4.1% from 2016. As previously discussed, Manitoba Harvest's results were distorted by strong growth in international ingredient sales to one Asian market in 2016 that did not repeat in 2017. For 2018 we expect Manitoba Harvest to produce solid revenue growth. However, we expect EBITDA to decline modestly as we invest in marketing and advertising to grow the size of the U.S. market. We are very pleased with the new executive management team and are starting to see improving results thus far in 2018. Crosman's revenue increased 1.1% and EBITDA declined 2.3% in 2017. Crosman's results were impacted by a large Junior ROTC contract that shifted from the fourth quarter of 2017 into the first half of 2018. We expect Crosman to grow revenue and EBITDA modestly in 2018. Lastly, 5.11's revenue grew 5% and EBITDA grew 6.5% in 2017. 5.11's direct-to-consumer business grew by 50% in 2017. As previously discussed, 5.11 implemented an Europe system in late 2017 that disrupted sales and caused an unusually large backlog as of the end of the year. We expect 5.11 to produce solid revenue and earnings growth in 2018 as we continue to build the consumer segment of this business. With that, I will now turn the call over to Ryan to add his comments on our financial results.

Thank you, Elias. Today I will discuss our consolidated financial results for the quarter and year ended December 31, 2017. I will limit my comments largely to the overall results for our company since the individual subsidiary results are detailed in our Form 10-K that was filed with the SEC yesterday. At the end of my remarks I will comment on CAD for 20188. On a consolidated basis, revenue for the quarter ended December 31, 2017, was $348.4 million, up 9.4% compared to $318.6 million for the prior year period. This year-over-year increase reflects notable revenue growth at our Clean Earth subsidiary, primarily due to contributions from the add-on acquisition of AERC Recycling Solutions in 2017 as well as the revenue contribution from Crosman and its acquisition of the commercial business of LaserMax. Revenue for the year ended December 31, 2017, increased to $1.3 billion, an increase of $291.4 million or 29.8% compared to $978.3 million for the prior year. The increase in revenue year-over-year is primarily the result of the contributions from our add-on acquisitions and Crosman. Net income for the quarter ended December 31, 2017, was $49.1 million as compared to net income of $2 million for the quarter ended December 31, 2016. During the fourth quarter of 2017 CODI recorded an income tax benefit of $38.7 million, primarily related to the enactment of the Tax Cuts and Jobs Act in December 2017, which lowered the U.S. federal corporate income tax rate from 35% to 21%. During the fourth quarter of 2016, CODI realized the net gain of $15.8 million related to an equity investment in our former subsidiary, Fox Factory Holdings. During the first quarter of 2017 we sold our remaining Fox shares in a secondary public offering. For the year ended December 31, 2017, net income was $33.6 million, primarily due to the previously mentioned income tax benefit. Net income for the year ended December 31, 2016, was $56.5 million, primarily due to a $74.5 million gain on CODI's prior investment in Fox. Cash flow available for distribution or reinvestment, which we refer to as CAD, for the quarter ended December 31, 2017, was $25.6 million compared to $24.6 million in the prior year period. For the year ended December 31, 2017, cash flow was $92.2 million as compared to $76.4 million for the prior year. The full year CAD increased from the prior year primarily as a result of the full year benefit of the 5.11 and Crosman acquisitions. Based on our 2018 earnings expectations for each of our subsidiaries and the recent accretive acquisitions we completed, including Foam Fabricators and Rimports, we expect CAD will meaningfully exceed our distribution for the full year 2018. As Elias mentioned earlier, we anticipate our common distribution payout ratio to be between 65% and 75% in 2018, assuming the same level of distributions in 2018 as in 2017. Moving to our balance sheet, we had approximately $39.9 million in cash and cash equivalents and net working capital of $314.6 million as of December 31, 2017. We had $560 million outstanding on our term loans and $42 million in outstanding borrowings under our revolving credit facility. We have no significant debt maturities until 2019. In addition, we had net borrowing availability of $507.4 million under our revolving credit facility at the end of the quarter. Subsequent to the closing of Foam Fabricators and Rimports acquisitions, CODI had net borrowing availability between approximately $50 million and $75 million. Turning now to capital expenditures, during the fourth quarter of 2017 we incurred $6.9 million of maintenance CapEx compared to $6.6 million in the prior year period. The increase was primarily due to the addition of Crosman. For the full year 2017 we incurred maintenance CapEx of $20.3 million as compared to maintenance CapEx of $20.4 million for the year ended December 31, 2016. During the fourth quarter we continued to invest growth capital at 5.11, spending $6.7 million during the quarter and bringing growth CapEx spend at 5.11 to $24.1 million for the full year 2017. For the full year 2018 we expect to incur maintenance CapEx of between $25 million and $30 million and anticipate growth CapEx spend of between $20 million and $25 million as we continue to invest in the long-term growth of our subsidiaries. We expect the majority of our growth CapEx spend will be to support 5.11's long-term growth objectives. Additionally, we anticipate growth CapEx spend at Advanced Circuits to invest in new manufacturing capabilities to support its growth. I'd like to now make a few comments on 2018 CAD. We mentioned previously in our remarks that we expect to meaningfully exceed our distribution during 2018. In addition, Elias highlighted our overall expectations for earnings at each of our subsidiaries in 2018. I'd like to remind investors of the seasonal nature of certain of our businesses, and as a result, we generate our lowest EBITDA during the first quarter. Further, we anticipate our maintenance CapEx spend will be concentrated at the beginning of 2018. Our seasonally lower EBITDA, coupled with this early 2018 CapEx spend, will negatively impact our CAD generation in the first quarter. In summary, we expect that our CAD in the first quarter will generally be in line with last year's first quarter CAD. Further, we will see the benefits of comparatively higher EBITDA and lower CapEx spend starting in the second quarter of 2018. With that, I will now turn the call back over to Elias.

Thank you, Ryan. During 2017 CODI continued to successfully execute its investment strategy, generate strong cash flow and provide attractive distributions to our shareholders. Keeping to this strategy in 2018, CODI has completed two accretive acquisitions subsequent to year end. I would like to close by briefly discussing M&A activity and our forward growth strategy. Middle-market deal flow remained steady in 2017 relative to 2016. High valuation levels continue to be driven by the availability of debt capital with favorable terms and financial and strategic buyers seeking to deploy available equity capital. Going forward, our team remains focused on marketing CODI's beneficial ownership and management attributes to pursue attractive platform acquisitions as well as add-on acquisitions to accelerate the growth of our subsidiaries while maintaining our discipline to deploying capital. By following this course we will continue to create long-term value for our shareholders and grow cash flow to a level that meaningfully covers our distributions. This concludes our opening remarks and we'll be happy to take any questions you may have. Operator, please open the phone lines.

[Operator Instructions]. And our first question comes from the line of Larry Solow from CJS Securities.

Alan, you may be on one more conference call, but we'll wish you good luck now and maybe we'll do it again in the future. Just one quickie on the CAD outlook. I guess if you do the math, it looks like it's like $190 million to $215 million. That's a pretty big spread. Is there any reason for that or any color on that?

Larry, our intention is to provide some guidance within a range. As you know, now tracking 10 companies and their earnings and their cash taxes and their CapEx spend created complexity, and we felt like a range made sense for you guys to be able to guide to.

Okay, fair enough. I know you guys don't usually guide to CAD specifically anyhow, so this certainly gives us something to have. Okay, great. Just a few questions just on the branded. Obviously, multiple issued with the bankruptcies, and I think that, hopefully, will be transitory. But just the inventory drawdowns, especially big box retail and the Amazon effect, if you will. Do you guys see that impact lingering in '18 and beyond, or do you feel like most of that was washed out already?

Yes, Larry, this is Elias. I would say that that change that's occurring right now in the retail landscape is with us for kind of an extended period of time. Not only is Amazon continuing to grow much faster than the overall market and take share, but each of the brick-and-mortar companies are investing more and more in their e-commerce capabilities. And so this shift that we're seeing right now to e-commerce, we don't see that starting to slow at all. I think companies are positioning themselves to better adapt to those environments. And as you mentioned, the inventory drawdown that's occurring as the business shifts more to e-commerce with quicker turns is definitely a headwind to vendors in the channel, including a lot of our branded consumer companies. I think 2017 was a particularly difficult year, especially with bankruptcies of 2 of our kind of largest customers cross our companies, and so that, I think, was something that was unanticipated. We don't anticipate that recurring in 2018. And so as a result of that, I think that headwind will no longer persist. But I do believe the transition that's being experienced overall in retail poses some longer-term -- intermediate-term, at least -- headwinds for any of its vendors. And I don't think that's going to abate. I think we would tell you, and by the guidance from each of our companies, in most cases our companies are trying to adapt to this; in some cases, take control of their own destiny like a 5.11, which is doing much more on a direct side. But overall, if you kind of read through our guidance, company by company, and roll that up, I would say we expect slightly lower growth rates in our consumer business in 2018 than what its historical growth rate has been. And that really, kind of embedded in that guidance is the headwind from a continued shift into e-commerce. Is it possible that some of the inventory in supply chain changes, the headwinds from that will abate in 2018? It is, but at the same time, we've chosen to be a little bit more cautious in our view because we're just not sure if that's going to happen or not.

Okay, fair enough. Just one quick follow-up just specifically on ERGObaby, which has been a pretty big growth driver for you guys. It sounds like '17 was impacted, obviously, by some of the things we just discussed. Your outlook for '18 flat -- is that sort of any reason why you don't expect a little bit of growth to resume in '18 with some new products coming out and what-not?

Yes, so I'll ask Pat Maciariello to answer that for you, Larry.

Yes, I think, as Elias says, part of that is conservatism. Part of that is we're continuing to see some of those supply chain headwinds in the inventory drawdown you discussed. We do have a number of new products that we're excited about, but these take time to snowball. And right now some of them are on limited distribution, and they'll take time to snowball. So I'd say it's a basket of sort of conservatism and kind of wait-and-see on the new products.

And our next question comes from the line of Leslie Vandegrift from Raymond James.

First off, Alan, congrats on the change. I hope there are sunny beaches in the near future. Go hang out and relax on them now. And Elias, congratulations on the promotion. I just wanted to start off with a question on, it looks like later this week or next week, the possibility of that import tariff on steel could pop back up. I know we discussed it at the beginning of the year, but just outlook for Liberty if those kind of changes were to come into effect?

Yes, I'll ask Dave Swanson to answer that, Leslie, and then I'll add in.

Sure. So we are seeing some impact from that already. Just the talk of tariffs has an impact on steel prices. So I'd say Liberty has budgeted for that as a headwind and is doing everything it can to offset in other ways. But it is a big material cost for Liberty and will be a headwind. As Elias mentioned in his comments, we do expect some modest growth from Liberty this year, and I think that's despite the steel price headwinds. But we're certainly seeing some of it and expecting it.

Okay, and then on the other side of that, any time there's talk -- not necessarily anything changing, but any time there's talk in the news -- gun laws being looked at or changed, I know that that has pushed Liberty sometimes one way or the other. Are you guys seeing any of that right now?

Not right now, and I think it's a little bit too early to tell. Obviously, when these tragic events happen, everybody is saddened and there's kind of renewed calls for gun legislation that picks up. And in some cases, historically we've seen that propel sales as consumers get nervous about what might be coming down the pike. It's really too early right now. I would say after the change in the 2016 election, market conditions changed pretty dramatically because I think people were not as worried about gun legislation. But as of right now, it's just too early to tell.

Okay, all right. And on the tax change, obviously, you gave the number for the impact on the fourth quarter. Going forward, what do those impacts look like for the subsidiaries?

Yes, sure. So there's really three aspects to the new tax legislation that impacts our subsidiaries. Of course, domestically. We all, or some of our businesses have international operations. So there are taxes we pay foreign, so those will continue as they are. But on the domestic side, of course we've got the rate deduction -- reduction -- from 35% to 21%, which is a real nice benefit to our companies at our C corporations, especially those that are taxpayers. Of course, some of our companies are not taxpayers. Some of our companies, too, that are recently purchased who have tax assets are also not taxpayers. So it helps a few of them, but not all. In addition, there's the ability to accelerate the deduction of CapEx spend which, interestingly, began in September, so some of our companies took advantage of that in Q4, but that will be a nice cash flow tailwind in '18. And offsetting that, of course, is this interest deduction limitations. And that, again, affects only, I believe, 2 of our companies with respect to that. But interestingly, those are also the companies that have higher CapEx spends. So they'll have the benefit of that accelerating the deductibility of that CapEx spend. So net-net, it is very positive to the companies. In terms of modeling and how to think about it, historically if you went back the past few years, our cash taxes as a percentage of our consolidated subsidiary EBITDA has been between 13% and 15%. And interestingly, 2017 was very low. It was, I think, a little bit above 9%, and that's a function of some unique circumstances. One is, of course, some companies took advantage of that accelerated CapEx spend, which I mentioned. But also, one of our subsidiaries had a significant R&D tax credit study done and paid virtually no tax in 2017. So pushing '17 aside as a very unique year, I think going forward, that range, you can expect to be at least in '18, where we've got some visibility, between 10% and 12% of consolidated subsidiary EBITDA. Okay, again, caveat being foreign tax impact is something that will continue as is without any of these benefits I mentioned. Does that help?

That does, thank you. Appreciate that. And just more specifically on 5.11, I know you had the tax asset when you purchased it. And just how exactly did that get impacted?

So the tax asset we had was impacted. So any company with any type of deferred asset would have been adjusted down, just given the future rate. So there was a small adjustment for that. It wasn't that material, but it is something that occurred. And when we look at the new acquisitions, both of which have tax assets, the benefit of those, of course, as we factored in this lower rate into the acquisition process. So feel good about that. But 5.11 definitely did have an impact that went through our income tax provision as a benefit this quarter.

Okay, perfect. And just the last question, with the two new acquisitions so far this year, and I think you gave the range of, in your credit facility, $50 million to $75 million left right now of liquidity. What's the outlook there on if you still see acquisitions and add-ons coming down the pipeline? And kind of your appetite for that, given your limited liquidity right now.

Yes, so we continue to look for new add-on acquisitions. We continue to look for new platform acquisitions. That hasn't changed. We are constantly looking at our capital structure and at our liquidity and looking to enhance that. So we feel that if the right opportunity comes along that capital is available in today's market, and we would be excited to move forward at the right opportunity. But we, as you know, we're constantly looking at different options in our capital structure and continuing to evolve it.

And our next question comes from the line of Douglas Mewhirter from SunTrust.

Just had a couple of questions, some on subsidiaries and some on the overall company. First, I noticed when Dick's Sporting Goods and Walmart came out with their recent pronouncements of not selling assault-style weapons, they also added a sort of a ban on sort of non-slide ammunition or non-lethal weapons that look like assault weapons, which I assume to mean like Airsoft and air guns. And I know Crosman, obviously, is very active in that category. I didn't know if your management team at Crosman had conversations with Dick's Sporting Goods and Walmart to get the specifics on that and if there would be any impact to Crosman's sales of those categories or, actually, of the laser sights as well.

So I can take that one, Doug. So conversations are ongoing. I would say that Walmart took steps in this direction several years ago, so the actual sales from Crosman to Walmart of the types of things that you just mentioned is pretty nominal, so it should not have a big impact; the same with Dick's. But clearly something that we're monitoring and having ongoing conversations with all of our customers. But this was something that took effect a couple of years ago already, so it shouldn't be a big impact.

Okay, thanks for that. Moving to 5.11 and...

No, I was going to say in fact there are some SKUs from competitors that probably fall more in this category, and we feel like it could be an opportunity to displace.

Okay, thanks, that's helpful. Moving on to 5.11, how would you characterize your newest -- I know you're opening a lot of brick-and-mortar stores and you have impressive growth through your website and through, I guess, I assume Amazon sales. But how would you characterize your new store performance, and has that affected your view on how many stores, the pace of store openings in 2018?

Yes, so the new stores are performing exceptionally well. And if we went back to when we acquired the business, the new stores are performing well beyond what our expectations are. And I think the company is meeting a need in the market that heretofore has been unmet, and it's really exciting for us. I think the channel that the company has historically gone through on a wholesale basis is more limited than what the market opportunity is, and so we look at building out our own distribution as a key element for the growth strategy. I would say that given the performance of the business, or of the early stores, the payback that we're experiencing on those stores that have been open for more than 12 months, kind of just the growth rate, all of the underlying metrics that we look at are strong enough for us to continue with that opportunity. With respect to 2018, I would tell you it's hard to really accelerate a lot. You've got to put infrastructure in place to support that. We have been building that infrastructure, as you know. We put in a new Europe. That system was partially put in to enable growth in our direct-to-consumer so that we would be able to provide to our consumer, our end consumer, all of the type of things that they're looking for that have to be enabled by technology. In addition to that, we're moving into a new warehouse that's roughly double the size of our old warehouse at the end of the first quarter. So we've been doing a lot of things to position this company to accelerate its growth, especially in the direct-to-consumer. All that being said, we have to get the infrastructure in place. I think 2018, it would be our goal to kind of match roughly what we did in 2017 in new store openings. And I think on a longer-term basis, we probably view the opportunity for retail stores to be slightly greater than what we may have thought on our last conference call. So I think with each store that we put down in different types of markets and the success that we're seeing in varied markets, it probably expands what we believe the addressable market to be and the number of stores that ultimately can be support domestically.

That's a very helpful answer. A quicker question on Sterno. Would you characterize the margins and growth profile of Rimports as higher or the same or lower than the organic Sterno platform?

Yes, I'd characterize the margins as slightly higher, and I'd characterize the growth prospects as similar to Sterno.

Okay, thanks. And just one last question. Overall, I'm assuming that with your guidance, building it up subsidiary by subsidiary involved a lot of conversations with management. And in the process of building up your forecast or expectations for 2018, was it more of a sort of -- this is your budget and this is your goal or is this sort of ore of management saying we're pretty sure we can do this and you sort of built it up form there? Or is it a combination of both.

Yes, it's a little bit of a combination of both. We obviously start with setting management budgets. And then from there, we look at the corporate level as to making adjustments so that we feel very confident in our ability to achieve within the range that we've given you. As Larry mentioned earlier, the range is a little bit wide. But that's reflective of the fact that there are 10 subsidiaries and it is difficult to project everything, including cash taxes. But I would say we feel confident having worked with our teams and, where appropriate, taken adjustments, that the range we've given you is one that we can meet. I would also say that coming into 2018, in general our companies are, I would say, outside of maybe some in the consumer space like an ERGObaby that we said kind of looks more flattish this year, I would say in general our CEOs are more bullish, especially on the industrial side. And I think that as we look at kind of upside opportunities versus downside risk, we think that it's reasonable balanced today and potentially has a little bit more upside than downside risk built into kind of the guidance range that we've given you. So we feel pretty good about it.

Our next question comes from the line of Brian Hogan from William Blair.

And I'd like to add my congrats to Elias and also on his retirement. Can I continue on kind of the guidance? I guess, with the 2 recent acquisitions, I kind of calculate maybe the accretion being around $0.50 from Sterno and the Foam Fabricators. If you kind of back into that, does that basically mean that the legacy is roughly, we'll call it roughly flat?

So when I think about your $0.50 and sort of high level, Brian, don't forget that in 2018, we'll only have 10.5 months for Foam and 10 months for Rimports. So it's probably a couple pennies less than what you've just mentioned. But also, too, as we think about '18 from a range perspective, the concept is to provide a range that feels attainable. And so we're not trying to stretch here. I'd say the base business, though, is growing. I think we've indicated that each business does have growth opportunities and growth potential. So therefore, CAD should grow. So I think that holistically speaking, with a little bit of growth in '18 plus the accretion from our businesses of 10 to 10.5 months, I think we feel pretty comfortable about that range.

All right. And then what's that, the range you said 65% to 75%. Do you have, shall I say, longer-term target you want to get to? And basically, what I'm trying to get to is like dividend coverage. Where do you feel comfortable that where you maybe, maybe eventually start raising the dividend because you have this meaningful dividend coverage?

Yes, Brian, so I think we're still a little ways away from exploring that. We would like to get down -- I think 50% is probably a target where we can start to think about different alternatives. And one of the things that we talk about internally is being able to, as we have in the past when we've opportunistically sold a business, being able to still remain comfortably above what our distribution level is after executing a sale. I think historically, we have felt that the stock hasn't reacted to some of the increased value that we've been able to realize upon a sale of an asset because we have at times dropped below what our distribution level has been in our earnings power until we've redeployed that money back in. And I think we'd like to comfortably get ourselves ahead of that. I think the second point is there have been questions historically about the sustainability of the distribution. And as a result of that, we believe that our stock likely trades with a higher distribution yield than what we would think would be normal in this kind of interest rate environment. So we think getting more of a distribution coverage, getting more coverage on our distribution from both of those standpoints, should be net beneficial to our shareholders and allow us kind of the freedom that we look for to operate and potentially execute against an opportunistic sale if one was to come up and not put pressure on our stock.

All right. On 5.11, in the backlog from the Europe issues, first off, what are the Europe issues. And in the 10-K you've said they've mostly been rectified but maybe still lingering a little bit. What's driving that, and are you still seeing headwinds? And the $20 million backlog, would most of that have been revenues in the fourth quarter? Just kind of give us some more color there.

Yes. So the Europe issues that we experienced -- when you implement an Europe system, I think most companies would tell you these things generally, no matter how much planning you do, are harder because you do have a lot of customization for what you're doing specifically in your business. And you start with something that's more off-the-shelf, but until you go live, you don't know where your bottlenecks and other issues are going to arise. In particular, when we implemented in late September, as we all know, there was some sales that shifted from September into the fourth quarter because we were down on shipping days. In the fourth quarter, because our Europe was being implemented, October in particular was tremendously lower than what we would have expected from a shipping standpoint. I mean, we were just having bottlenecks occur throughout our processes. And over the course of a couple of weeks, we were able to get the system to work much smoother. And so we were actually quite pleased with the speed at which we got the Europe systems and mostly on better footing. What ended up occurring, and this is both a good and bad thing, is demand was incredibly strong. And as a result of the strength in demand, we weren't able to shift, given certain constraints that we have right now in our existing footprint, as much as we would have liked to. There's just a maximum amount that we can shift, even working multiple shifts, out of our current facilities. So part of that backlog and the number that you referenced, not all of that would have made it into 2017, but I would venture a guess that more than half of it would have had we been able to shift. Then kind of came into 2018 with a higher-than-usual backlog. We are going to move into our new facility at the end of this quarter, so there are some costs that we should expect in the first quarter to enable that move and to be running a little extra in order to clear the backlog. So we would expect and we are starting to see the business -- the backlog come down, shippings get more normal. But there are some higher costs as we transition in. And after we get in our new facility, which would be kind of late first quarter, start of the second quarter, we think we've by and large gotten behind some of these growth initiatives and we feel that we'll be very well positioned to kind of satisfy the growing demand that we're seeing for this brand.

All right, and do you think you'd lost any sales because of the issues?

There's probably some. I don't think it was material. If you said, could we have lost $3 million to $5 million of sales, I think that's probably the reasonable range that we may have lost. Most of it was really pushed into the first quarter, but in some cases with some of our partners, if they were doing holiday sets and we weren't able to get product shipped in time, we may have lost an order for some space that we otherwise would have had. In terms of permanent loss of floor space, we don't think that's an issue at all, but there may have been some modest loss of sales due to the timing.

All right. Manitoba Harvest, the impairment taken there. I guess what does it say about your longer-term view for the opportunities for Manitoba Harvest? Obviously, your guidance for 2018, there's solid revenue growth and EBITDA down because of the marketing, which is fine, investing for growth. But just kind of what does the impairment mean?

Yes, and Ryan can add to this -- but my understanding, from the impairment side, it really is looking at kind of how the company has performed to date and what our expectations are versus kind of what our original expectations were. And due to a slight mismatch the impairment was taken. It doesn't change our vie win terms of what the outlook for this business is. This is something that is more kind of quantitative that is done by the accounting -- by our accountants. But in terms of kind of -- the reason it got here and to this point, I think as we know, we've been building a management team there. It did take us a little longer to get the human resources in place to be able to invest in and to position the company where it is now. I think it's probably, realistically, 18 to 24 months later than what we had anticipated. But it doesn't change our view, Brian, of the size of the opportunity or the achievability of the opportunity. And in fact, with kind of our new team in place and some of the things that we're doing right now, we are more bullish today than we've been on this investment in quite some time. And we're starting to see really strong early results so far. I mean, in Q4, notwithstanding the results were not as strong as we would have liked, the actual sell-through data that we look at was considerably stronger than our results, and that's kind of leading to -- so you can get a little bit, as you know, in the supply chain of rebalancing. That's leading to a little bit of probably strength coming into 2018. In addition, we are starting to drive more marketing and advertising dollars, trying to grow awareness. We did some really great things with our packaging. If you see the product on the shelves of our retail partners, you will see some new, innovative packaging that we got out there. And all of those things are really starting to create some great tailwinds, and we're looking to invest strongly behind that. Kind of what we've been saying over the last couple of years, we're now finally being able to do, and it's an exciting time for us. So notwithstanding the impairment, this does not at one iota change what we view as the long-term opportunity.

All right. And then just briefly on Foam Fabricators, can you discuss the longer-term growth potential of that business? Obviously, it's got some attractive margins and generated $126 million of revenues in the last 12 months. Can you just talk longer-term growth there?

Yes, obviously, I mean, I'll preface by starting, I think, in this environment, we perked it at a reasonable multiple of cash flow. So I don't think -- our investment hypothesis is not predicated on -- or our returns -- predicated on astronomical growth. That being said, I think there are some areas for growth. If you look at increased shipping online, increased food delivery online, stuff like that, if you look at biologics and the increased use of biologics by pharmaceutical manufacturers, a lot of that needs protecting packaging; a lot of that needs a temperature-controlled environment. So there is some real growth aspects to it. Obviously, it also helps when appliance manufacturers continue to build facilities in the U.S., as a lot of those are our customers. So I'd say there's good tailwinds, but I think we bought it at an attractive price. It is a little bit of a cyclical business, given that that there is some appliance revenue there, and a good chunk of the business comes from appliances. Did that kind of answer your question? Generally, some good macro trends. The investment is not predicated on massive growth, though.

And I'm currently seeing no further questions, and I would like to turn the call back to Elias Sabo for any further remarks.

I'd like to thank everyone again for joining us on today's call and for your continued interest in CODI. We look forward to sharing our progress with you in the future. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone have a good day.